Estate planning with an AB trust

Married couples in California with substantial assets may want to consider the benefits of setting up an AB trust. While AB trusts are not for everyone, they can significantly lower the tax burden on some estates. Beneficiaries who would have been taxed heavily on their inheritance may be able to receive their entire inheritance tax-free with an AB trust.

A couple that sets up an AB trust will first fund the trust with their combined assets. When one spouse dies, half of the assets from the original trust are put into Trust A, and the other half are put into Trust B. The assets in Trust A are considered to belong to the deceased spouse, so Trust A becomes irrevocable. When the surviving spouse dies, all of the assets from Trust A and Trust B can pass along to the beneficiaries without incurring estate taxes.

When the first spouse dies after an AB trust is set up, the surviving spouse can still benefit from the assets in the deceased spouse's trust. However, the surviving spouse will have limited control over how the assets may be used. The surviving spouse may receive income from the trust and use the trust's property for things like living expenses, education and health care.

Married couples that are over the age of 60 with no children from other marriages usually derive the most benefit from AB trusts. While AB trusts can reduce estate taxes, one of their drawbacks is that they require a great deal of bookkeeping. An estate planning attorney may be able to help a married couple determine whether an AB trust is right for their situation and help them set up and manage one.


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